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Foundation and Operating Charity Investments Disappointed in 2011

The nonprofit sector experienced negative investment returns in fiscal 2011 for the first time in three fiscal years, according to two companion studies released this week by Commonfund Institute.

The 179 independent, private and community foundations participating in the 2012 Commonfund Benchmarks Study of Foundations reported an average total net return of -0.9%. This compared with 12.5% in FY2010 and 20.9% in FY2009.

At the same time, 68 operating charities—comprising cultural, religious and social service institutions—participating in the 2012 Commonfund Benchmarks Study of Operating Charities had an average net return on investment funds of -1.8%, compared with 11.6% in FY2010 and 21.5% in FY2009.

The three-year average return for participating foundations was 10.5%, a big improvement from last year’s -0.3%, thanks to the fact that the FY2008 return was no longer part of the calculation.

However, that return did enter the five-year calculation, resulting in a net return of 1.5% compared with 4.2% in last year’s study. For the last 10 years, participating foundations reported an average annual return of 5.2%, little changed from last year.

For operating charities, three-year returns averaged 10%, up from 0.1% the year before; five-year returns averaged 1.8%, down from 4.7% last year; and the 10-year returns averaged 5.5%, up from 4.9% last year.

John Griswold, executive director of Commonfund Institute, said 2011 was a frustrating year for foundations and operating charities. “On top of the negative investment returns, the addition of inflation and investment management costs means that these institutions fell a little farther behind financially, even before spending for mission support.

“It’s fortunate that this year was preceded by the two strong years of FY2009 and FY2010. We are also encouraged by the fact that gifts and donations to operating charities rose again in FY2011, even though giving remained less than robust.”

Twenty-six percent of operating charities reported an increase in gifts received in FY2011, up from the 10% reporting an increase the year before. Just 12% of study participants reported a decline in gifts received, compared with 17% in FY2010. Forty-nine percent reported no change.

Spending last year strengthened among foundations, but slipped a bit among operating charities. Half of participating foundations reported higher spending in dollars in FY2011, compared with 38% the year before.

Thirty percent of operating charities reported increased spending in dollars, up from 25% in FY2010.

Foundation Investments

The Foundation Study’s participants comprised 133 independent/private foundations and 46 community foundations, representing a combined total of $100.4 billion in assets.

Independent/private foundations reported average net investment returns of -0.7%, while community foundations reported average returns of -1.4%.

Viewed by asset class, fixed income produced the highest return, 5.7%, while international equities lost 12.2%. Domestic equities returned -0.1%, alternative strategies gained 2% and short-term securities/cash/other was down 0.1%.

Within the broad alternative strategies asset class, the highest returns were generated by venture capital, at 14.2%; private equity real estate (non-campus), at 9.2%; and private equity, at 8.9%.

Commonfund said that in FY2011, foundations continued a long-term trend of increasing their investments in alternative strategies, with this allocation rising to 43% from 38% in FY2010 and 35% the year before.

In contrast, international equities accounted for a 12% share of foundation portfolios, down from 16% in FY2010, and domestic equities declined to a 24% allocation from 26%. The fixed income allocation was unchanged at 13%, and the allocation to short-term securities/cash/other rose by one percentage point to 8%.

Operating Charities Investments

Participants in the Operating Charities Study included 31 cultural organizations, 18 religious institutions and 19 social service group, representing $24.2 billion in assets.

Fixed income again kicked in the highest return, with an average gain of 5.2%, and international equities were the big disappointment, down 10.1%.

Among other broad asset classes, domestic equities eked out a 0.2% gain, alternative strategies lost 4.1%, and short-term securities/cash/other were down 0.7%.

Resources, Management and Governance

Participating foundations reported an average of 1.3 full-time equivalent staff members who deal with investment matters, down slightly from 1.5 in FY2010. The number of voting members on foundations’ investment committees averaged 6.2, of whom 3.2 on average were investment professionals. Eighty percent of foundations reported using a consultant.

At operating charities, 1.6 full-time professional staff members on average were devoted to investments, up from 1.4 in the FY2010 study.

Seventy-two percent of study participants reported having a chief financial officer, unchanged from last year, while 18% reported having a chief investment officer, slightly higher than last year’s 15%.

Eighty-seven percent reported using a consultant, compared with 83% a year ago. The average number of voting members on investment committees fell to 7.6 from eight last year. The average number of investment committee members who are investment professionals was 5.1 versus 5.4 last year, while those with alternative strategies experience rose to 3.4 from three.